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Tips for Buying an Investment Property in Canada

General Konstantin Seroshtan 24 Jun

#1. Think About Financing Early

Canadian banks are very conservative when it comes to issuing mortgages for rental property investment. You’ll want to think about financing fairly early on to account for the likelihood that getting approved won’t be as easy as it was for your primary residence.

Prime lenders will typically want to see that you’re capable of making mortgage payments on both your primary residence and investment property without your debt-to-income ratio surpassing the 36% mark.

Crucially, they’ll want you to have this capability even without your investment property’s rental income. After all, your property may not be rented 100% of the time. Lenders will want to make sure the vacancy won’t leave you unable to make your payments.

You’ll also need a strong credit history in order to qualify for a mortgage on an investment property.

Truth be told, those new to real estate investment often don’t meet these stringent criteria, making it next to impossible to get a loan from one of Canada’s big five banks. But do not worry, I have access to many alternative lenders who specialize in investment property mortgages.

#2. Avoid a Fixer-Upper for Your First Investment Property

Buying an investment property will be stressful enough without the hassle of renovations. Unless you have a professional background in home renovation and can easily gauge the time and effort that will be involved in the project before you buy, avoid a fixer-upper for your first investment property.

If you ignore this advice, it’s very likely you’ll end up overpaying for a renovation that takes much longer than you expect. Avoid this by purchasing a property that’s in good condition. Save the fixer-uppers for once you’re more experienced.

#3. Account for Operating Expenses

Generally, a rental property’s operating expenses comprise 50% of its income. In other words, if you rent a property out for $1,500 per month, expect to spend roughly $750 of that on operating expenses.

That may sound like a lot, especially since you likely don’t spend anywhere near that amount of money maintaining your own home. However, operating expenses include not just maintenance, but also taxes and insurance unique to owning a rental property.

Remember to keep these figures in mind when shopping for a rental property.

#4. Expect the Unexpected

Your investment property costs won’t be limited to relatively predictable things like taxes and maintenance. You’ll also need to prepare financially for unexpected circumstances, such as your tenant losing their job and being unable to cover rent.

It’s generally recommended that you plan to set aside a certain portion of your rental income each month to account for potential unexpected expenses.

#5. Choose the Neighbourhood Wisely

When shopping for your primary residence, you probably chose the nicest neighbourhood you could afford. The problem with applying this logic to your search for a rental property is that a more expensive home will, of course, cost more to insure and maintain.

Instead, experts generally recommend looking for a cheaper property in a modest neighbourhood.

Additionally, when choosing a neighbourhood, look for one that:

  • has a high percentage of employment (anything below 50% is low)
  • is not governed by a homeowner’s association (fees and restrictions will absolutely decimate your profit margins)
  • has a relatively low crime rate
  • has very few vacant properties
  • is located near amenities such as highly-rated schools

#6. Figure Out Your Margins

While it’s safe to say that – barring any major mistakes – you’ll make money investing in a hot real estate market like Canada’s, it’s important to calculate your margins carefully to avoid any surprises. By doing this before you purchase a property, you’ll give yourself enough flexibility to change tactics if needed.

There are three very important metrics that can help you determine your margins:

  • cash flow: your monthly rental income, minus expenses
  • cap rate: (cash flow / property value) x 100
  • cash on cash return: (cash flow / your cash investment) x 100

#7. Research your legal obligations as a landlord

Most Canadian provinces have very strict tenant protection laws that can impact your profitability. For example, evicting a tenant in British Columbia involves a fairly long process, even if the renter in question isn’t paying.

You also need to be aware that the onus for property maintenance is on you as the landlord. If an appliance breaks down, for example, you’ll need to pay for repairs or a replacement. In many Canadian provinces (including BC, per its Residential Tenancies Act), this applies even if you state otherwise in your lease agreement.

#8. Consider Working with a Property Management Company

If your job or other obligations are demanding, you’d be wise to work with a management company that can offer guidance regarding how to buy an investment property. Property management companies handle a wide variety of things for you, including:

  • collecting rent
  • addressing maintenance concerns
  • marketing
  • maintaining records

Of course, this comes at an additional cost to you. Expect to pay between 5% and 10% of your rental income to a property management company.


#9. Think Long-Term

Real estate valuations rise over the long haul. Don’t discount the possibility of short-term turmoil, though. You can mitigate the impact of this turmoil by viewing your real estate investment as a long-term play. The longer you own the property, the more likely you are to benefit from positive trends in the Canadian real estate market (generally speaking, properties here won’t get any cheaper as the country’s population continues to grow).


#10. Take Care of Personal Debt Before You Buy

To increase your chances of getting a good mortgage with a reasonable interest rate, take care of your personal debt. Specifically, if your debt-to-income ratio is above the 36% mark (or dangerously close), you’ll need to address that.

There are many ways to approach this, including refinancing your primary residence to consolidate the debts or take out the equity for the down payment on a rental property.

Let’s chat about your options!

















Credit: Alpine Credits